← InstitutionalLesson 8 · 3:47
Vanna, volga and charm in a real book
Summary
You can name and explain vanna, volga and charm, the three forces that move a hedge while the price stands still. You can show what a volatility spike and a weekend do to a hedged book of sold wings, and why short-dated books feel all three most.
Key terms
- vanna
- How much an option's delta changes when volatility moves.
- volga
- How much an option's vega changes when volatility moves, which makes losses on sold wings speed up in a spike.
- charm
- How much an option's delta changes as days pass, even with the price and volatility unchanged.
- sold wings
- A book that has sold out-of-the-money puts and calls on both sides of the price.
Check yourself
Answer each question to see why the right answer is right.
1. A book of sold XYZ wings is hedged to zero delta with 7 days left. Volatility jumps from 30% to 45% overnight and XYZ does not move. What happens?
2. Why does vanna tend to hurt a sold-wing book at the worst moment?
3. At 30% the book's vega is minus $127 a point; at 45% it is minus $147; at 60% minus $154. At 60% the book is down $4,339 while vega alone said $3,798. What is this?
4. XYZ closes Friday at $100 with 7 days left and opens Monday at $100 with 5 days left. Volatility has not changed. What happened to the hedged book?
5. You rebuild the same book with 30, 14 and 7 days left. The volatility jump moves delta by 36, 61 and 69 shares; the weekend by 4, 14 and 34. What should a desk take from this?
Finished the video and the quiz? .